VAT Fraud

Basic interventions: matters to consider when determining whether to use a civil intervention: assessments and penalties: raising penalties in particular circumstances: application of penalties when using the Kittel or Mecsek principle

A penalty for transactions connected with VAT fraud: s69C

From 16 November 2017 Section 69C of the VAT Act provides a new penalty for transactions connected with VAT fraud.

It only applies where HMRC establishes that the business knew or should have known that its transactions are connected with VAT fraud i.e. when the knowledge principle applies. The new penalty can be issued at the same time as the knowledge principle decision e.g. Kittel or Mecsek.

If we have sufficient evidence to apply the knowledge principle then a penalty will be charged at the rate of 30% of the VAT amount denied or assessed under the knowledge principle decision: ss69C(7).

Like the knowledge principle decision the issuing of the penalty is an appealable matter: ss83(1)

The new penalty cannot be applied:

where a person is convicted of a criminal offence: s69C(12)(b)

when a Schedule 24 penalty has been or will be issued: s69(12)(a)

where the transaction was entered into before s69C came into force i.e. before 16 November 2017

The law

The new penalty has been implemented into UK legislation in the VAT Act 1994.

Section 69C sets out the conditions for the penalty.

Section 69D sets out the conditions for applying the penalty to company officers.

Section 69E sets out when a company or company officer should be named.

Mitigation

Unlike Schedule 24 (FA2007) the new penalty does not offer reductions for prompted and unprompted disclosure to HMRC.

However either HMRC or the First-tier Tribunal may reduce the penalty if the trader has acted in good faith or there has been no significant VAT loss. In cases where the knowledge principle applies any reductions for mitigation will need to be agreed by the VAT Serious Non Compliance & Fraud Team policy team.

The amount of mitigation allowed will depend on the circumstances of the case. When we consider mitigation we will consider all the surrounding facts which led to the transactions being connected with VAT fraud and the business’s subsequent behaviour when interacting with HMRC.

HMRC are not compelled to reduce the penalty. However this matter must be considered by officers and there should be a clear audit trail of that consideration.

Mitigation should be allowed where the trader has behaved reasonably. For further information please see the guidance on mitigation.

Timing of the penalty

In general we should aim to issue the penalty at the same time as the knowledge principle (e.g. Kittel *or *Mecsek) decision. However legally we have a two year time limit to assess the penalty after the knowledge principle denial decision is issued.

There may be rare occasions when it is expedient to delay issuing the penalty. One example might be when a knowledge principle decision is approved as suitable for the alternative dispute resolution (ADR) process. In these circumstances it may be desirable to await meeting with the trader as part of the ADR process before determining HMRC’s position on the penalty. The reason for this is that the ADR may entail new arguments being put forward or further evidence being furnished by the business. It is right that HMRC considers these points before issuing any penalty.

Application to company officers: s69D

Section 69D(1)(a) and (b) set out that a company officer is liable to the penalty when:

the company which they were working for at the time of the transactions is liable to a penalty because it knew or should have known that its transactions were connected with VAT fraud pursuant to s69C; and

the actions of the company which give rise to that liability were attributable to the company officer i.e. the officer knew or should have known that the company’s transactions were connected with fraud.

The company officer is liable to pay a portion of the penalty which may be up to 100% of the assessed penalty amount. Where the above conditions are met the entire penalty, or a portion of it, can be transferred to an individual who was a company officer at the time of the transactions. The liability and the penalty (or portion of the penalty) must be specified in a “decision notice”: s69D(1).

Where there is more than one company officer liable for a penalty then the penalty may be apportioned between the company officers. This apportionment should take into account the extent of each individual’s involvement in the transactions under consideration that were connected with VAT fraud.

It should also be noted that HMRC is not able to recover more than 100% of the assessed penalty amount when applying the penalty to company officers: s69D(5). Furthermore where a penalty is issued to and paid in full by a company a second penalty cannot be levied on a company officer.

Where most or all of a business’s transactions are connected with fraud, then it is likely to be expedient to issue a decision notice to a company officer, providing that we are satisfied that the company officer knew or should have known that the transactions were connected with fraud.

Application to company officers of businesses which are usually compliant

One reason for imposing company officer liability is to ensure that the assessed penalty amount can be recovered. Therefore as a general rule we will not be seeking to apply the penalty to company officers where the company is an established business whose transactions are primarily untainted by VAT fraud (i.e. a business that is normally compliant). One reason for this policy is that we would expect most of these businesses to be able to pay the penalty therefore there should be less need to seek to recover the penalty from company officers. However there may be exceptional circumstances where a company officer has acted in a particularly egregious manner, such that recovery action against them may be appropriate.

Informing company officers of liability for a penalty

Where the penalty is attributed to a company officer and a decision notice is sent to them, the company officer must pay this portion within 30 days of the notice being given to them: s69D(4).

Please note that the issuing of a decision notice under section 69D or the portion of a penalty assessed under 69C which is specified to a company officer in a decision notice are both appealable decisions: s83(1)(na) and (nb).

Timing of the decision notice regarding liability of a company officer

A decision notice may not be given before the amount of the penalty due from the company has been assessed, but it may be given either alongside this assessment or afterwards: s69D(3)(a).

Before giving a decision notice HMRC must:

Inform the officer that they are considering doing so, and

Afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified: s69D(2).

The decision notice cannot be given more than two years after the VAT denial decision was issued: s69D(3)(b) .

Naming participants: s69E

HMRC has the power to name those that knew or should have known that their transactions were connected with VAT fraud where the amount of VAT denied or assessed to which the penalty (or penalties if there is more than one) related to exceeds £50,000: s69E(1).

HMRC may also wish to name company officers, although they can only do so where the amount of the penalty attributable to the company officers in the penalty decision notice exceeds £25,000: s69E(3).

As a matter of policy we will seek to use this power sparingly and restrict this naming provision to the more serious cases. We should not name those businesses that are primarily established to carry out legitimate trade as opposed to those facilitating VAT fraud (i.e. we do not intend to name businesses, including their company officers, which are normally compliant). Furthermore, we will only name either repeat offenders (i.e. more than one knowledge decision) or those that are involved in an orchestrated attack on the VAT system, taking into account the above factors.

If you propose to name participants please highlight the reasons why you consider this action is appropriate, with reference to the above paragraph, in the means of knowledge or Mecsek submission.

What details can HMRC publish when naming a business or company officer?

Under the new penalty HMRC can name both a business and its company officers, including:

Name

Address (including office address)

Nature of business

Amount of the penalty

The VAT periods

The officer’s position and/or former position

Any other relevant information that HMRC consider appropriate to make clear the officer’s identity: see ss69D(2) and (4).

Naming - Notification and representations

Once your case has been through the appropriate governance process and been you will need to notify the business and/or company officer(s) of your intention to name them. This is to allow them time to make representations, which the legislation requires us to do: s69E(6). We would usually allow a period of 30 days for them to make representations.

Businesses or company officers will have an opportunity to provide reasons for why they think they should not be named on HMRC’s internet site and any representations should be sent to the VAT Serious Non Compliance & Fraud Team for consideration.

Where we do not hear back from businesses, HMRC officers should seek to contact the business or company officer by telephone or email, to check that they are not going to reply. Officers should also show flexibility around holiday periods to ensure that businesses and company officers have adequate time to respond.

If we do not hear back from the business, or those in the governance process are not persuaded by the representations made, then we can go ahead and publish the details online of those facilitating fraud. This will be actioned by the VAT Serious Non Compliance & Fraud Team.

Please note that there is no right of appeal in relation to the naming provision.

Naming – Restrictions & Time limits

No information can be published prior to the penalty becoming final and until the representations have been considered. So if the underlying penalty is being appealed we cannot publish details of the business or any company officers: s69E(7), (10) and (12).

HMRC is only allowed to publish information within one year of the penalty becoming final: s69E(8) and (9).

Information can only be published or remain published for up to three years following the date that the penalty becomes final: s69E(11). The reason for this relatively lengthy time limit is to act as a deterrent against those that wish to participate in VAT fraud.

What if there is more than one penalty?

Where there are multiple penalties covering different VAT periods, the time limits detailed above will run from the latest day from when any of the penalties becomes final: s69E(12).

Example: Company A is awarded a penalty under 69C of VATA 94 on 1st May 2018 for VAT period 05/18 and another penalty under 69C on 1 September 2018 for VAT period 06/18. The company does not appeal either penalty. Therefore as the appeal period lasts for 90 days from the decision notice then HMRC, this would mean that the penalty would be finalised by 30 November 2018. HMRC would only have one year from this date (i.e. up to 29 November 2019) to publish details of the business and company officer that were participating in VAT fraud. Furthermore we would only be able to publish details for three years from the decision date – so assuming no more penalties are made against the company, HMRC would not be able to publish any details following 29 November 2021. However, the 29 November end dates would apply to the penalties for both the 05/18 and 06/18 VAT periods.

The reason why the 29 November end date applies to both penalties (i.e. for 05/18 and 06/18 VAT periods) is because the second penalty resets the clock for HMRC to publish details about Company A.